PennyMac Mortgage Investment Trust — Q1 2022 Form 10-Q
Reporting period: Unaudited quarter ended March 31, 2022; comparisons are generally with Q1 2021, or with December 31, 2021 for balance-sheet figures. PMT is a specialty finance company investing primarily in residential mortgage assets, including mortgage servicing rights (MSRs), mortgage-backed securities (MBS), and credit risk transfer (CRT) arrangements. It is externally managed and serviced by affiliates of PennyMac Financial Services, Inc. (PFSI).
Financial highlights
| Metric | Q1 2022 / March 31, 2022 | Comparison |
|---|---|---|
| Net investment income | $81.8 million | $201.4 million in Q1 2021 |
| Pretax income | $18.1 million | $91.0 million in Q1 2021 |
| Net income (loss) | $(19.1) million | $71.6 million in Q1 2021 |
| Net income (loss) attributable to common shareholders; diluted EPS | $(29.6) million; $(0.32) | $65.4 million; $0.67 in Q1 2021 |
| Common dividend declared per share | $0.47 | $0.47 in Q1 2021 |
| Net interest expense; net interest margin | $12.5 million expense; (0.59)% | $38.7 million expense; (1.75)% in Q1 2021 |
| Cash and short-term investments | $424.3 million | $227.0 million at December 31, 2021 |
| Total assets; total liabilities; shareholders’ equity | $12.39 billion; $10.17 billion; $2.22 billion | $13.77 billion; $11.41 billion; $2.37 billion at December 31, 2021 |
| Total borrowings; debt-to-equity ratio | $9.80 billion; 4.4:1 | Borrowings were $11.18 billion at December 31, 2021 |
| Book value per common share | $17.87 | $19.05 at December 31, 2021 |
Performance and changes versus prior year
- Net investment income fell by $119.6 million year over year. The largest adverse items included a $229.1 million net loss on investments and financings, versus an $83.2 million gain in Q1 2021, and lower loan-sale gains ($4.0 million versus $53.0 million) and loan origination fees ($14.8 million versus $52.9 million).
- MSR servicing results improved: servicing fees, fair-value changes and hedging results together produced $304.2 million of net loan servicing fees, up from $50.0 million. MSR fair value increased $303.7 million, while MSR hedging results were a loss of $163.8 million.
- Investment losses included $186.5 million on MBS and $35.6 million on CRT arrangements. Management attributed MBS losses to sharply rising interest rates and CRT losses to widening credit spreads amid macroeconomic uncertainty. The prior-year CRT result was a $154.0 million gain.
- Correspondent loan purchases declined to $23.3 billion from $53.2 billion; total loan sales were $25.1 billion versus $51.7 billion. Management cited higher rates, weaker mortgage demand, and lower production volumes and gain-on-sale margins. Expenses decreased 42% to $63.8 million, mainly because of lower loan fulfillment costs.
- Cash from operations was $1.75 billion, investing cash flow was $(196.6) million, and financing cash flow was $(1.42) billion. Cash increased $128.9 million to $187.9 million. Operating cash flow was heavily influenced by changes in loans held for sale and should not be read as recurring earnings.
Outlook, risks and unusual items
- Management reported that the Federal Reserve raised rates in Q1 and expected further increases and reductions in its securities portfolio. Citing leading economists, PMT described a 2022 mortgage origination market forecast of $2.6–$3.1 trillion, compared with an estimated $4.4 trillion in 2021. Management expects lower market volumes and higher rates to pressure correspondent production and increase competition, while slowing MSR prepayments from 2021’s elevated levels. This is market commentary, not company earnings guidance.
- PMT is no longer creating new CRT investments following the FHFA-directed wind-down of new front-end GSE risk-sharing transactions. CRT credit performance, credit spreads, interest rates, prepayments, housing prices and MSR valuation assumptions remain material sensitivities. The company states that substantial portions of investment income are noncash fair-value items; noncash items were 171% of net investment income in Q1 2022.
- Liquidity and financing risks include substantial leverage, short-term repurchase borrowings, collateral margin calls, and reliance on continued access to committed and uncommitted facilities. Available repurchase borrowing capacity was $7.24 billion, of which $6.03 billion was uncommitted. PMT obtained lender waivers of certain positive-net-income funding conditions for Q1 2022 and may need further waivers. Management said debt covenants were met at March 31.
- Income tax provision was $37.2 million despite consolidated pretax income of $18.1 million, producing a 205.9% effective rate. Management attributed the tax burden primarily to taxable REIT subsidiary income associated with MSR fair-value increases. The deferred-tax valuation allowance declined to $6.8 million from $34.1 million at year-end.
- PMT adopted ASU 2020-06 on January 1, 2022, changing accounting for exchangeable notes; adoption reduced Q1 interest expense by approximately $1.7 million and resulted in balance-sheet/equity reclassifications. The liability for representations and warranties was $40.2 million. Loan-purchase commitments were $1.87 billion. Management reported no material legal proceedings and no off-balance-sheet arrangements.
- PMT identified LIBOR transition uncertainty for certain debt, preferred shares and serviced loans. It also depends on PFSI affiliates for management and servicing, and must satisfy REIT distribution and qualification requirements. Management cautioned that fair-value estimates and future results may differ materially from expectations; the filing provides no formal earnings or dividend forecast.
Most important facts for investors to verify
- Whether rising rates and weaker origination volumes continue to reduce correspondent production, loan-sale economics and earnings.
- How MSR valuation gains compare with hedging costs and realized servicing cash flows as rates and prepayment speeds change.
- Whether CRT credit-spread marks, borrower delinquencies and recoveries develop as assumed, and how much liquidity remains available if collateral values fall or margin calls rise.
- The availability and renewal terms of short-term financing, progress toward replacing uncommitted funding, and compliance with lender conditions after the Q1 waivers.
- Whether taxable REIT subsidiary income, tax expense and deferred-tax asset realizability materially affect reported results and cash available for distributions.
- How book value, leverage and common and preferred distributions evolve; reported common dividends were $0.47 per share for Q1, while book value per share declined to $17.87.